EconGuru » Library » Returns of Shares

The returns of shares are fortune that a shareholder gains directly because of his ownership of shares. It is the immediate cause for investors to deal with shares.

Returns of shares consist of two basic parts, the dividends as their portion of the company’s profits and the increased value of the shares themselves from which the shareholders get from selling the shares, known as appreciation.

How much you get from dividends of shares depends on several factors. First, it depends how many shares an investor holds. Usually, when a company decide the amount of bonus based on one single share, saying the bonus for one share. So the more share an investor holds, the more he will get from his investment in that shares. The dividend can be in different forms other than the capital. At the end of one fiscal year, the board of directors will make a decision on how the dividends will be handed out and the shareholders will go to the company to claim for the payment. The payment can be cash, which will be transferred to shareholders’ bank accounts. Or the payment can be in shares. The company gives shares to shareholders as dividend, which are equal in the value to the capital in the former case. However, if a company pays by shares, it will lead to either of the two results. The company additionally offers shares, which is a form of capitalization, or it increases investors’ portion of holding share.

Another component of returns of shares is capital appreciation by holding shares. In its simpler case, the returns can be counted by the market value of the shares. But if shareholders take the the average market profits into account, they may need more calculation because of the existence of opportunity costs. If they save the money in the bank, they might get the interest at the annual interest rate. Or if they buy national debts, they might get interest at the agreed rate, which is even slightly higher than that of the interest from banks because of the risk of debts is higher than the risk of bank saving and the interests are the compensation of risks. Since the investors can choose only one kind of investment, you will lose the other two once you invest the your money in stock market. Now, they are paid for their investment. If the appreciation in their shares results in more value than bank saving or national debts, their investment were better off. Otherwise, they were worse off.

The analysis above is based on the intention for any investor that they need to beat the market, or at least gain at the same interest rate with market. And if you gain less than the average level of the market, the investors indeed made a wrong investment. Maybe they should buy index tracker funds instead.

The two factors of returns are also correlated. Because a company needs money to expand its business. The annual profits can be used to enlarge the business like setting up new plants, buying more cutting-edge devices, or hiring more talents. But if profits are handed out as dividends, it reduce the ability of that company to develop. In return, it will also hurt the long-term appreciation of the company’s shares. So some companies choose to reduce the dividends and save more money for its future business expansion.

In conclusion, the returns of shares consists of two part, the dividends and the appreciation in value of the shares. These two parts can affect each other and how they are balanced depends on the business strategies of the company.